Fewer Flights and Higher Fares: Is This the Future of Air Travel?

If the American Airlines and US Airways merger goes through, four carriers will control nearly 85 percent of U.S. air travel, leading to higher fares, fewer flights, and less choice for many fliers. Barbara S. Peterson reports on the fallout from the latest round of mega-mergers.

The Last Airline Merger

If the American Airlines and US Airways merger goes through, four carriers will control nearly 85 percent of U.S. air travel, leading to higher fares, fewer flights, and less choice for many fliers. In fact, industry-wide, fares are rising, planes are packed, and flying has never been more of a hassle. Barbara s. Peterson reports on the fallout from the latest round of mega-mergers and actually sees a few silver linings for fliers too

Until recently, Luann Edwards never thought much about how she would fly to meet with clients or to vacation overseas. The Providence-based social media marketer recalls when Continental could get her to virtually any spot on the globe with just a quick change of planes at its Newark international hub, and Southwest offered cheap fares to points across the United States from its Rhode Island outpost. But then Continental merged into United, other airlines struggling with high costs cut flights, and Edwards noticed that getting out of town was a lot more difficult and expensive. "The schedules became terrible," Edwards says. "I'd spend two days getting where I needed to go." Fares shot up. "When I was told that it would cost me $700 to fly to Philadelphia, I got in my car and drove for six hours," she says. But if Edwards drives one hour north to Boston's Logan, the picture is far different. There, she finds more flights, fares below the national average, with at least five domestic carriers—as well as plenty of foreign ones—vying for the business of frequent travelers like her.

Game Over

Just over a decade ago, ten large airlines offered frequent service around the country. But after a series of failures and mergers, that number stands at five. Now American Airlines is set to merge with US Airways in a union that will not only make American the world's largest carrier but will leave only four carriers—American, Delta, Southwest, and United—controlling what some analysts estimate is nearly 85 percent of U.S. air traffic, leading to higher fares, fewer flights, and less choice for many fliers. (JetBlue and Alaska, by comparison, have just four and three percent, respectively, of the U.S. market.) "We are in the ninth inning of the game of consolidation" that began with airline deregulation in 1978, says David Berkowitz, an aviation industry consultant. After five mega-airline mergers in eight years, there are no other major unions in the offing and, he says, given the current playing field and economic climate, it's unlikely a new generation of challengers will rise to take on the establishment.

"This is not your grandfather's airline business," says Ray Neidl, an aviation consultant for Nexa Capital and former American Airlines official, who notes that the lessening of cutthroat competition doesn't mean consumers won't see some benefit. For instance, the financial strength of the airlines will enable them to invest in new technology—including the latest fuel-efficient aircraft and a cutting-edge satellite navigation system to replace the country's aging radar-based air-traffic control. "It took us 35 years to get there, but it's almost a brand-new industry," Neidl says. Indeed, United says that the economic benefits of its merger with Continental allowed it to make much-needed upgrades, such as modernizing airport baggage systems and replacing its aging 757 fleet with new jets with better bin space and in-flight entertainment.

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Is Bigger Better?

The airlines say their very survival depends on becoming so big they can ride out the industry's perennial boom and bust cycles, and it is hard to argue with their reasoning. "For years we've lurched from crisis to crisis," with billion-dollar losses to show for it, says Gary Kennedy, a senior vice president of American Airlines who's among those selling the merger on Capitol Hill. "Now we finally have an opportunity to create a stronger and more stable company that can withstand the inevitable shocks." Those shocks are well known from the headlines: fuel prices that have soared from 10 percent to as high as 40 percent of airline operating expenses in ten years; terror attacks; disease epidemics; and swings in the overall economy. Airlines are particularly vulnerable to these forces, which explains why billionaire investor Warren Buffett famously said that someone should have done "capitalism a favor" and shot down the Wright brothers' first flight. The newly bulked-up mega-airlines might finally prove him wrong—if, as their recent profits suggest, they can use their might to run more efficient operations. And at least consumers won't have to worry about the airline they just bought a ticket on going under prior to departure.

But the airlines' gain could be the passengers' loss, as carriers raise prices and rein in spending—often by slashing staff. While fares have, on average, remained relatively stable, fees for add-ons have soared and decreased competition has resulted in steep price hikes in several markets. Some of the ways you may already be feeling the effects of a pared-down airline business:

Fuller planes: An average of 83 percent of seats are filled, up from 71 percent 12 years ago—and airlines are jamming more seats into coach, removing galleys and even bathrooms to make space.

More connecting flights: With fewer nonstops on many key routes, you'll have to change planes more often.

All that may explain why a growing number of fliers say they are unhappy with U.S. carriers. A recent study from researchers at Purdue and Wichita State universities found that airline complaints rose more than 20 percent in 2012 despite the fact that punctuality and baggage handling were much improved. Purdue's Brent Bowen put the blame squarely on mergers: "When you merge two mediocre airlines, all you get is one worse big airline." And carriers shouldn't gloat over their improved on-time performance, he pointed out, since that was the inevitable result of their cutting back capacity sharply since 2007. Fewer bags are lost because fees have discouraged people from checking them, he said.

Memphis Blues

To see what the future may bring, head to Memphis—if you can find a flight there. The city could serve as the poster child for the depredations of consolidation. In 2008, when Delta and Northwest announced their intention to merge, locals were assured that the combined carrier wouldn't desert them despite stiff competition with Delta's massive Atlanta hub a few hundred miles away. After the merger, flights dropped precipitously and, as one local leader put it, "There are now more conversations in Memphis about high airfares than about music or barbecue."

A "Delta Does Memphis" Facebook page has garnered scores of irate comments from local citizens, like lawyer John Ryder, who complained that Delta wanted to charge him "$900-plus" for a trip to Lexington, Kentucky, with a layover in Atlanta. He noted that he could drive to his destination in less time. Delta defends its moves at Memphis as part of the hard choices it had to make when the carrier's fuel tab jumped by $4 billion a year. "We are a business, and we're going to bolster the places we're the strongest," says Delta spokesman Anthony Black. "In some of these markets, the demand just wasn't there."

Of course, Delta is only one of several carriers wielding the ax, and all the cutting is making airlines profitable for the first time in years. That's little comfort to fliers in cities where air service has dried up or ticket prices have climbed into the clouds. Clifford Winston, senior fellow at the Brookings Institution, says that consolidation has channeled more than 75 percent of air travel into large hub routes. "A city like Atlanta is on the right side of this one," he says. "Unfortunately for those living in Memphis, their city is not." Other critics see an oligopoly taking shape, with a few market players influencing pricing even if they don't actively control it. "When there are a small number of competitors, it's easy for them to agree not to compete head-to-head," says Christopher Sagers, a professor at Cleveland-Marshall College of Law. Representative Steven Cohen (D.-Tenn.), one of Washington's more vocal critics of mergers, put it more colorfully: "It sort of looks like they got together and carved up the country," he said at a recent congressional hearing on the antitrust implications of the American-US Airways merger. "They are each getting their slice of the pie."

A decade ago, the United States had roughly 20 sizable hubs, typically defined as an airport where the dominant carriers offer at least 75 daily departures. Now that's down to 10, and at many of them a single airline controls more than two-thirds of the market. "It's a classic case of 'you stay out of my backyard and I'll stay out of yours,' " says Kevin Mitchell, chief of the Business Travel Coalition. Airline capacity has shrunk by nearly 20 percent in the United States since 9/11, but at medium-size airports, the reduction is closer to 35 percent.

A look at four key airports shows the impact just one airline can have when it holds most of the cards: Cleveland—once a Continental strong- hold—has lost 26 percent of its departures since United scaled back; in St. Louis, American Airlines has slashed 85 percent of its flight schedule since 2001, when it took over the bankrupt TWA.

One of the biggest losers in the consolidation reorganization may be Cincinnati. When Delta decided to downsize its hub in 2009 after it merged with Northwest, the airline eliminated 60 percent of its flights there. Cincinnati last year had some of the highest average round-trip fares in the country: $519 versus the nationwide average of $367. It's no coincidence that other big price jumps have occurred in markets most affected by merger mania: In Memphis, the average fare shot up to more than $500 in the first half of last year, from $373 six years ago; in Cleveland, the price jumped by more than $100 since 2007, from $331 to $443.

And those are just the averages. In reality, travelers to those cities are often asked to pay far more. Michael Derchin, a transportation analyst for CRT Capital in Connecticut, recalls being quoted a fare of well over $1,000 for a flight from New York City to Cincinnati. "It was so outrageous I didn't even try to get it approved," he says. Instead, he found a cheap flight to Dayton, about an hour's drive from his destination. Even after hiring a car service, he saved $500. Cincinnati's dubious status as the high-fare capital of the United States is starting to hurt its economy, Derchin says. Hometown corporations like Procter & Gamble and Macy's "are finding it more and more of a problem to run their business due to impossible air service," according to a recent report from the New America Foundation, a public policy institute; one company, Chiquita, recently announced it would pull up stakes and move to Charlotte, North Carolina, for that very reason.

Looking Ahead

The price transparency made possible by the Web has been used to defend consolidation and to counter arguments that it would lead to higher fares. At a congressional hearing back in 2008, airline executives responded to government concerns about the Delta-Northwest merger by insisting that the market-disciplining effect of online sellers such as Expedia, Travelocity, and Orbitz creates such transparency that it will keep prices low, as Douglas Steenland, then CEO of Northwest Airlines, promised. But Expedia and other online travel agencies have already complained that they've been denied the ability to offer "choice seats" from carriers, including American, which has been embroiled in legal battles with some of them.

At the same time, the airlines are—in concert— planning a new business model that would make it difficult to do apples-to-apples comparisons of airfares. The carriers are planning to roll out "personalized" fares that will be tailored to individual fliers based on things like their travel history, zip code, frequent-flier status, and the like. These fares would not be advertised or published in any publicly accessible database and could jeopardize the transparency consumers have enjoyed for more than a decade, and which the public has been told guarantees fairness and competition in a rapidly consolidating field. While travelers could still shop anonymously, they'd be given every inducement not to do so. "This sounds like Big Brother to me," Representative Cohen said when asked about this bespoke pricing scheme, which is now before the Department of Transportation. The International Air Transport Association, which backs the move, counters that consumers will still be able to compare prices.

Fortunately for the flying public, these custom prices are years away, if they're ever unveiled. What may come sooner is greater scrutiny of airline competition from the watchdogs at the DOT.

While a return to tight regulation of the industry is unlikely, the government could step up its vigilance. It could, for example, demand landing slots from American and US Airways as a condition for green-lighting their merger, forcing them to cede precious space at airports like Washington National, where the new, bigger American would have close to 60 percent of the market. That would allow challengers like JetBlue, Virgin America, or Spirit to enter the market. "You really do need smaller carriers to come in and keep them honest," Virgin Ameri- ca's Richard Branson told Condé Nast Traveler, remembering his five-year battle to win slots at Newark, where United now controls fully two- thirds of the real estate. But even if a few niche airlines rise up to take on the majors, it certainly won't happen until the economy is on firm footing.

So is the story really over in the short term? With the Big Three carriers either married off or in committed relationships, and with budget champ Southwest settling into a fallow period to manage its rising costs, it seems there could be no surprises left. But don't count on it: Internet forums were recently buzzing with rumored unions among the remaining independent lines, pairing Spirit and Frontier, JetBlue and Virgin America, and Alaska and Hawaiian. Even trans-border unions may some day happen. Sound implausible? Perhaps. But not long ago, so did the prospect of four giant companies controlling air travel in this country.